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The 80/20 Rule: Balancing Ownership and Management Responsibilities

By Amy Schuman

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Many business founders dream of the day that the next generation will join them in the business. While entry of the next generation can be a very exciting time, it also presents challenges. One of the many decisions the family must make at this point is how to treat these young people. Should they be treated just like everyone else, or given special consideration as family members and current or future owners? Too much special treatment is not desirable, creating a sense of entitlement. However, it is unrealistic to expect a next generation family member to be “just like everyone else.” He or she will likely be a future owner, and as such will require a different kind of exposure and knowledge of the business. To prepare a strong group of next generation owners, they need extensive exposure and experience to the business they will own one day. NG (next generation) members who are treated like any other employee may lose valuable opportunities to build the skills they’ll need as future owners.

There are upsides and downsides to each approach:

 

 

No special treatment
Special consideration as a future/current owner
Upside
Downside
Upside
Downside

Learns the reality of the work world

Gains empathy for employees

Gains respect and credibility with others

Misses opportunities
to gain ownership
preparation

Misses opportunities to develop skills more quickly
 
May become de-motivated
Take advantage of opportunities to learn and grow as an owner

Prepare knowledgeable next-generation owners/ managers

Reflects the reality of the situation
Sense of entitlement

Distance, antagonism from non-family employees

Unrealistic experience and expectations

 

 

One solution to this dilemma is a new application of the familiar 80/20 rule. Have the next generation owner spend 80% of their time in their job, and 20% of their time outside the normal responsibilities of their job. This 20% would be devoted to special projects and activities specifically geared to helping the next generation person prepare him/herself to be a knowledgeable, capable owner. Activities that fall into this 20% might include:

  • Participating in a strategic planning session
  • Visiting an important customer or supplier
  • Attending a Board of Directors meeting
  • Taking an ownership-related class or seminar
  • Listening in on a parents’ estate planning session
  • Scheduling a regular (monthly/quarterly) lunch or coffee with top management relatives
  • Identifying and regularly meeting with a mentor outside the family and business
 

The 80/20 solution has worked in many businesses of varying sizes and industries. It has many advantages. Probably the most significant advantage is that it recognizes the reality of the successor’s situation. They are not, and will never be, “just another employee.” Others will always be aware of their family/ownership status, and they’ll always be under the microscope to some extent. As much as they might want to blend in, not be noticed, and have an experience just like anyone else, that is not a realistic option. They have to learn to manage the dual role – of employee and owner – from the start.

We should note here that the 80/20 split is appropriate for NG members working in the business. For NG members who are not involved in the business operations, dedicating time to ownership preparation is still important. And, the activities identified for the ownership preparation above still apply. However, the time allotted to ownership preparation may vary, depending upon other constraints on the NG owners’ time (e.g. employment, school, parenting, etc.)   Families often dedicate time at shareholder meetings for NG owner education, particularly if there is a group of NG owners in a tight age range.

While the 80/20 approach can be very effective, special assignments for NG members should be planned carefully. Considerations include:
 

NG member skills and interests

Assignments should be selected that balance the need for exposure to new areas with the desire for the NG member to complete the task successfully. Also, allowing NG members to gravitate to jobs that naturally fit their interests and abilities has to be balanced with requiring a wide exposure to a range of business areas.

Timing of assignments

Once areas of exposure have been identified, they need to be sequenced appropriately. And, timing of succession must be considered as well. Other considerations include not leaving someone too long in a job or area they hate, as well as leaving people in a job long enough to really benefit.

Supervision

The NG member will benefit more from an assignment if an appropriate supervisor is chosen. Consideration should be given to the supervisor’s coaching style, willingness to deliver honest feedback to family members and empathy for the NG member’s situation.

Performance management

To gain valuable experience from an assignment, the NG member needs feedback on his/her performance. Before the assignment begins, clear goals should be established, and a system for measuring performance against the goals should be established, including a clear understanding of who will be evaluating performance.

And, an understanding should be established between the NG member, his supervisor and family members concerning what feedback the family will receive on the NG members’ performance. 

If the family anticipates more than one NG member will enter the business, a structure should be created to manage entry. This structure will answer questions such as:

  • How will NG assignments be selected?
  • How will NG performance be evaluated?
  • How will family members in the business interact with each other?

If regular meetings of family members have not already started, entry of the NG is a great time to establish such meetings. In addition, regular gatherings of NG members can be beneficial. Besides the obvious team building benefit – building a strong, trusting group of next generation owners – the NGs can share tips for success and provide each other with support.            

There are many decisions to be made with NG members begin to enter the business. The more thoughtful planning that goes into managing the entry process, the more likely the NG members will be to succeed. The 80/20 rule allows you to set high expectations while recognizing the reality that the next generation owner will never be just like everyone else.

 

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